RETIREMENT FUNDING TRAINING 13 Nov By Johan Kotze

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There are three basic types of retirement funds in the South African retirement system: o pension funds o provident funds o retirement annuity funds. Retirement funds accept contributions for the benefit of (and from) members with the purpose of establishing and growing a member's retirement interest (i.e. savings). For individuals that change employers, there are preservation funds that hold retirement savings until retirement

Member’s contribution deduction for income tax purposes: o To pension fund – 7,5% of ‘retirement funding employment’ income, also referred to ‘pensionable income’ o To provident fund – 0% o To retirement funds – Generally 15% of ‘non- retirement funding employment’ income, also referred to ‘non-pensionable income’ Fragmented regime

Employer contributions to pension funds and provident funds are tax deductible up to certain limits. If a contribution to a retirement fund is tax deductible, the payout is taxable. If a contribution is non-deductible, the payout is tax-free. Growth is never taxed in a retirement or preservation fund and is therefore always taxable upon payout. Payouts from a retirement fund can be in the form of a lump sum or an annuity. A lump sum will be taxable according to the retirement tax tables while an annuity will be taxable according to the recipient's marginal tax rate.

Pension and retirement annuity fund members are bound by a mandatory annuitisation requirement that requires the members to annuitise a part of their fund interests upon retirement. However, provident fund members are not required to annuitise any portion of fund savings. As a result, provident fund members typically receive their retirement interests as a lump sum upon retirement. As a general matter, mandatory annuitisation for pension and retirement annuity funds requires that at least two-thirds of a member’s total retirement interest be paid in the form of an annuity (including a living annuity) upon retirement. These members will always be entitled to receive at least one-third of their total retirement interests in the form of a lump sum upon retirement. It should be noted that where a member exits any retirement fund prior to retirement, there is no mandatory annuitisation required. Members in this situation may choose to preserve their fund interest or to receive their entire interest in the form of a lump sum.

The de minimis exception overrides the mandatory two-thirds annuitisation requirement. If the total value of a fund interest at retirement does not exceed R75 000, the exception permits the member to receive the entire retirement interest in the form of a lump sum. This exception is based on the premise that an annuity of less than R is not cost effective in terms of commission and administrative fees. This exception applies separately in respect of each membership interest in a retirement fund.

Preservation funds exist to allow individuals to preserve their retirement savings when changing employers. Therefore, pension preservation and provident preservation funds cannot accept contributions from members; these funds can only accept transfers from (employer-provided) pension and provident funds. Members of a pension preservation fund have the same mandatory annuitisation requirement upon retirement as pension fund members (e.g. the same two-thirds versus one-third calculation). Similarly, members of provident preservation funds (as with provident fund members) are allowed to receive their entire retirement interest in the form of a lump sum upon retirement.

In general, no tax is levied on the transfer of retirement savings from one fund to another. However, due to the lack of annuitisation requirements in provident and provident preservation funds, transfers of retirement savings to those funds are taxed if the transfer is from a retirement or preservation fund where annuitisation is mandatory. This measure ensures that retirement savings in funds that require mandatory annuitisation remain segregated from funds without mandatory annuitisation.

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